December 1, 2008
1st Circuit Reverses Award Against Ameriquest of $750,000 for Emotional Distress
In re Nosek, 544 F.3d 34 (1st Cir. October, 2008)
Issue: Does Section 1322(b) require a creditor to properly allocate payments made on a mortgage between pre- and postpetition?
Holding: No, not by itself. The plan would have to have accounting provisions which then may have been violated.
This chapter 13 debtor had a history of difficulties with Ameriquest, a lien on her home. She filed three separate chapter 13s; the first two being dismissed for her failure to provide information to the trustee or make payments. She made a deal with Ameriquest during the third case (after an initial plan was confirmed but she did not keep up the payments) to cure over 60 months and a new plan was confirmed. She got behind on the plan payments and attempted to find a new loan. She asked Ameriquest to provide her a “pay-off figure and payment history.” The payment history showed “the amount Ameriquest had received, the date on which a payment was recorded, and a column stating that each payment had been placed in an escrow account called a ‘suspense account.’” According to Ameriquest, they had two bookkeeping systems. The first was a computer system which simply applied a payment made to the oldest payment due, in effect, ignoring the bankruptcy. The second system was done by hand by a bankruptcy specialist and noted the payments applied pre and post bankruptcy. “The parties disagreed as to whether the Payment History accurately reflected [the debtor’s] post-petition payments. [The debtor] claimed that all of her payments were made in full in the amounts provided to her by Ameriquest and that Ameriquest erroneously failed to distinguish between pre- and post-petition payments.” The debtor filed a motion to determine the “Amount of the lien.” At the judge’s suggestion, she filed an adversary proceeding seeking damages under various theories. After summary judgment, a trial, an appeal, remand by the district court, and further proceedings after the appeal, the bankruptcy judge found that the debtor had no actual monetary damages but had emotional distress damages and gave her judgment for $250,000 for emotional distress and $500,000 for punitive damages. The basis for the ruling was that Ameriquest violated Section 1322(b) and that he had the power to grant damages under Section 105. The district court affirmed.
The 1st Circuit reversed. “The bankruptcy court's finding that Ameriquest had violated its implied covenant of good faith and fair dealing by acting contrary to the text of 11 U.S.C. § 1322(b) is central to this appeal. . . . The court concluded that Ameriquest had violated § 1322(b) by failing ‘to account for and properly distinguish between pre-petition and post-petition payments made by [Nosek], as well as ... [its] inability to promptly credit [Nosek's] account from the suspense account.’ The court highlighted instances where there seemed to be sufficient funds in the account to satisfy at least one of Nosek's contractual obligations, but the money remained in a suspense account. Further, the court found that the Payment History which had been sent to Nosek failed to reflect all of the payments she had made, giving the impression that she had failed to comply with the Plan obligations. Based on these inadequacies, the bankruptcy court concluded that Ameriquest had violated § 1322(b) of the Bankruptcy Code and Nosek's Chapter 13 Plan, and that Ameriquest had breached its implied covenant of good faith and fair dealing toward Nosek.” The 1st Circuit ruled that 1322(b) does not require a bank to do anything; it merely sets forth options for the debtor. “Moreover, even if the Payment History could somehow be construed as a threat to her right to cure, the proper response of the bankruptcy court would have been an amendment to the Plan specifying the accounting practices necessary to eliminate that threat.” And since the bankruptcy court found no actual damages or harm, the judgment was vacated and the matter remanded.
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